"Complex" Real Options - Title Page - MIT

will continue to

will continue to dominate in total aircraft sold and either surpass or rival the total valuesold of twin aisle aircraft (Airbus 2006, Boeing 2006).6.3.2 COMPETITIVE SITUATION IN LARGE COMMERCIAL AVIATION INDUSTRYBCA, as the incumbent in the industry, has seen a loss in market share from a high ofnearly 70% of orders after the acquisition of McDonnell-Douglas in 1997 to a near paritywith AI currently. Currently, both AI and BCA have a family of aircraft that have avariety of payloads and range capabilities. The AI family starts around 107 passengerswith the A318, an A320 derivative, and extends up to the forthcoming A380 with 555passengers. The BCA family starts around 110 passengers with the 737-600 and extendsup to around 467 passengers with the forthcoming 747-8. A summary of the families ispresented in Table 6-3. The shaded entries are planes sizes that a BWB type aircraftcould compete with effectively.Table 6-3 AI and BCA Product Offerings, matched by closest competing products. Datafrom (Airbus 2007, Boeing 2007).Airbus Product OfferingsBoeing Product OfferingsAircraftFamilyPassengers Range(km)AircraftFamilyPassengers Range(km)A320 107-185 5600-6800737 110-215 5648-10,200A310 220 8050 767 245 10,454A330 253-295 10,500-12,500757(discontinued)A350 253-300 13,900-16,300787 220-300 5650-15,750A340 239-380 13,350-16,100777 301-365 14,594-17,556A380 555 15,000 747 467 14,815From the mid-1970’s to the late 1980’s AI developed and marketed a family of planes,including all of those listed above with the exception of the A350 and A380, which arecurrently at some phase in development, and began to erode BCA market share. In the1990’s BCA was determined to maintain a 60% market share and priced its planesaccordingly to achieve this goal (Hartley 2004). As a result, BCA reduced prices over20% off list prices (Biddle and Helyar 1998), which created future problems, as BCA didnot have a lower cost production advantage over AI (Hartley 2004). In the competitiveaircraft sales market, the low prices that BCA was offering, matched by AI, combinedwith good economic conditions occurring before the Asian financial crisis in 1997 causeda large surge in orders for both AI and BCA. While BCA was a leading provider oftechnically advanced products, its internal processes for such activities as designcommonality, parts management and supplies created large inefficiencies in production.Because of these inefficiencies, as BCA attempted to ramp up its production capabilities240

to meet rising demand, the overall manufacturing system within BCA melted down,eventually resulting in a one month shut down of production to sort out the situation(Hartley 2004). The resulting delivery delay, combined with canceled and reduced ordersresulting from the Asian financial crisis and the 9/11 terrorist attacks resulted in areduced number of orders, making the remaining orders even more competitive betweenAI and BCA. To continue to win orders, AI offered deep discounts, but BCA refused tofollow AI into unprofitable territory, resulting in AI winning a greater percentage oforders for the first time (Hartley 2004).The competition between AI and BCA has also been driven by changes in the airlineindustry, especially deregulation of the US airline industry that has resulted in creatinggreater cost competition and increased sensitivity to costs, including aircraft purchase andoperating costs. The resulting increase in competition for orders has caused AI and BCAto reassess their own business models, with an increased focus on customer requirementsand focus on driving costs out of the supply chain (Harrigan 2006).AI has continued its reliance on derivative aircraft for blending continuity and innovation(Thorton 1995) to continue to sell high quality aircraft at competitive prices. This is doneby offering a range of aircraft that have multiple features in common, such as identicalcockpits or identical fuselages and wings, which allow airlines to reduce maintenance andtraining costs or allow AI to reduce tooling and design costs. AI has also continued itreliance on designing and manufacturing critical components internally, especially fornew models, reserving outsourcing for older models that are nearing the end of theirlifecycle, allowing AI to keep its leadership role in manufacturing (Harrigan 2006).BCA has chosen to take a different route, as demonstrated with the move towardsrecasting itself as a prime integrator with the new 787 Dreamliner, in a similar manner asthat embraced earlier by the auto industry (A.T. Kearney 2003). Traditionally in thedesign and manufacturing process, BCA would do most of the design work itself, retain ahigh share of manufacturing in house and do most assembly in house as well, using thesame manufacturing techniques that it had used for decades (Laudon 2000). Specializedsubassemblies, such as engines or avionics would be provided by specialists. Theremaining components would be designed by BCA and built to design by suppliers,without much real interaction between BCA and the supplier. Additionally, BCA wouldprovide all the investment needed for the program (Harrigan 2006). With the 777program in the mid-1990’s BCA relied more heavily on several Japanese suppliers totake a larger role in some design and manufacturing tasks, though BCA still provided thebulk of the capital investments.Focusing on systems integration, BCA is trying to reduce unit costs and potentially shiftsome of the non-recurring design and development costs and risks down the supply chainto suppliers (Pritchard and MacPherson 2004). The system integrator forms an integratednetwork of suppliers, in which each partner has a core competency in some area, with thesystem integrator ensuring that the entire system fits together in the end. Thisresponsibility includes technical responsibilities for the overall design and productionprocesses, program management responsibilities for costs, timings, and uncertainties, and241